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I'm considering making a an early withdrawal from my 401k and understanding the tax implications (tax at marginal rate and 10% penalty). The question I have is this:

I have a capital loss carry over from the previous year. Can I deduct that capital gains my 401k withdrawal from the capital loss? If so, my capital loss is greater than the amount I wish to withdraw from my 401k. Therefore, I would only have to pay the 10% penalty.

Sorry, but that doesn't work. The withdrawl from your 401K is Ordinary income, not a capital gain. So you can't deduct your excess capital losses against the withdrawl.

Also, don't forget that your state may also tax the withdrwawl and may have it's own penalty. In California (my home state), I usually advise clients that about half of the withdrawl will go to taxes.

I'd look at just about any other option you have before taking money out of the 401k.

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